Not out of woods yet….

We are back here to throw more light on Bharti Airtel and indication on how market behaves and has its own mind. We have said it before you cannot trust on market and take investment decisions. Market can mislead and should not be trusted if you are long term investors.

We had written earlier about Bharti Airtel on this blog and you can read them by clicking here and here.

There was no surprise to us to see that their profits have fallen down to Rs 2266.9 Crore. This represents Rs 6 per share earnings and a return of mere 4% on shareholders equity.

Borrowings have jumped from 69,000 Crore to around 73,000 Crore and slowly they are burning their cash reserves too. Half of their operating profits were used to pay their finance and currency fluctuation expenses. These expenses are twice to its reported profits!

To make it simple to understand business economics of this business, imagine you started a business and invested your own Rs 10 lakh in the business. You went to your local bank and borrowed Rs 14.5 Lakh so that you expand your business.

After one year of operations you managed to report profits of Rs 40 thousand only!

The question comes up in my mind after 9 months, is this bottom and will we see business to rebound?

If I am a business owner of this business, I am not happy with its performance. Also I have not yet witnessed any evidence in improvement of its fundamentals.

There is not all bad news about this business. There is one sweet part for you if you are the owner of this business. The market is willing to buy your business and debts and happy to pay you Rs 22.5 lakh today!

Is there something I am missing? Why market is happy to pay almost 2.25 times to its book value for those returns. I looked at a very reputed consensus data of 40 most valuable analysts. They expect in simple terms their profits to double next year from Rs 40 thousand to Rs 90 thousand! Should that change my mind and buy at that price?

Bharti Airtel was an investment grade business two years ago and from that point have given returns of -18% for last two years, 1% return for last one year and-2% for last 6 month.

Word of wisdom “In long run, market prices do follow underlying business value and quality of the business does matters.”